Wednesday, January 18, 2012

The U.S. economy continues to struggle with high unemployment, only moderate jobs growth, and an oppressive level of government spending and regulation, but the outlook is nevertheless improving, as several indicators released today show.

The most surprising news was the stronger-than-expected rise in the NAHB Housing Market Index of homebuilder sentiment. It was also gratifying to me since a year ago I predicted that by the end of last year the housing market would be showing signs of life, and my prediction for this year calls for continued gradual improvement. My sense of the market's sentiment is that most people see housing construction and prices either flat or down this year, so gradual improvement coming off a multi-year and extremely low bottom are quite a surprise. Today's index reading is the best we have seen in four and a half years. Sentiment can play an important role in the housing market, so the increasing signs of a bottom could create a "buy it now before the price goes up" mentality, especially since houses have never been more affordable than they are today.

This chart shows an index of new mortgage application activity. It's been choppy of late, but an uptrend from the lows of summer 2010 is in place I believe, and this is consistent with the rise in the homebuilders sentiment index (top chart) and the increase in construction activity in the past year.

December industrial production increased 0.4%, and production is up at a 4.8% annualized pace over the past six months. The charts above show how manufacturing production continues to improve, rising at a 5.2% annualized pace over the past six months and 4% over the past year. The manufacturing sector has yet to recover its pre-recession high, which is unfortunate, but progress is being made, and that's what is important on the margin.

5 comments:

Excellent insights, but I think what is being missed is the role the dollar has in helping US manufacturing exports and domestic industries. Let us hope the dollar becomes an even better ally in the future.

So far, all of the hysteria about Fed-induced inflation has proven as weak as Tebow's game against the Patriots.

The better exchange rate for US manufacturers has not led to inflation; indeed we are again teetering on the edge of deflation. The better exchange rate for the dollar has meant many jobs and profits for domestic industries, one of the few really bright spots in the economy.

The Fed is to be criticized---for mumbling and dithering, when much more forthright and aggressive stimulative actions were needed.

A larger and sustained program of QE is needed, and clear growth targets for nominal GDP.

It is time for the right-wing to drop certain hoary, encrusted shibboleths about monetary policy, foremost that tight money and a "strong" (strong for importers, that is) dollar help anything.

Please explain Japan if you like tight money and a strong yen. It has been an epic failure.

If you think the dollar should be "stronger" (for importers) now,please explain why you like the good manufacturing growth we have enjoyed lately.

I don't agree with you on the housing front."Foreclosures expected to rise, pushing home prices lower"http://www.latimes.com/la-fi-foreclosures-20120112,0,7891659.story?track=latiphoneapp

Shadow inventory much larger than publicly disclosed and a surge in discounted REO is expected this year. The banks have been in full delay mode for many reasons. Legal barriers are among them, but with a problem this large, they were unwilling to deal with it in hopes it would correct itself as rising prices bailed them out. Everyone pinned their hopes on the federal reserve lowering interest rates so much that houses would become so affordable buyers would snap them up. It isn’t working out that way.California saw a second-half surge in initial notices of default — the first warnings that a bank is preparing to seize properties with delinquent mortgages.

It can be said economic indicators are exploding upward - relative to where they have been.

It is a race. Pump money into the economy through central bank financing the budget deficit in an attempt to get the economy growing enough of offset the future deflationary effects of a) higher future interest rates when the economy recovers, or b) the debt becomes a problem in and of itself and austerity is forced. (Austerity used to be call prudence).

A Scott G theme: government is inefficient.My theme: the government everywhere and into everything.

Thanks to Bruce Krasting today, prepare to be blown away by the detail of where the government is http://www.cbo.gov/doc.cfm?index=12674 click on the pdf symbol on the right to view online. Start at page 17 and at random skip forward to see the tentacles of this creature.